Microsoft Posts Strong Gains in Q3 Sales, Profits

Revenue from Office and server products up sharply, but Windows takes hit from tablets.

Microsoft on Thursday reported double-digit increases in income and revenue for its fiscal third quarter, despite weakness in the PC market that dragged down Windows sales.

For the period ended March 31, Microsoft's revenues increased 13% to $16.4 billion. Net income was up 31% to $5.23 billion while earnings per share, including a 5 cent gain due to a tax benefit, rose 36% to 61 cents. Excluding the tax gain, EPS was in line with analysts' estimates of 56 cents per share.

"We delivered strong financial results despite a mixed PC environment, which demonstrates the strength of our businesses," said Microsoft CFO Peter Klein, in a statement. "Consumers are purchasing Office 2010, Xbox, and Kinect at tremendous rates, businesses of all sizes are purchasing Microsoft platforms and applications."

Leading the way for Microsoft was its Xbox gaming system. Xbox revenue, including Kinect sales jumped 69% to $712 million. The company's Business Division, which houses Office 2010, saw revenues increase 21% to $5.3 billion. Revenue from server software and related tools was up 11% to $4.1 billion, while sales of online services, including online ads, rose 14% to $648 million.

Despite gains throughout much of its product portfolio, Microsoft shares were off almost 2% in after hours trading as investors focused on the anemic performance of the company's flagship Windows unit.

Windows sales were off 4%, to $4.5 billion, as many consumers opted for tablets instead of PCs during the quarter. Microsoft estimated that total PCs sales were down 1% to 3% in the period. Netbooks were hardest hit by the tablet craze, as sales were off 40%. Overall PC sales to consumers fell 8%, Microsoft said. One the upside, business PC sales were up 9%.

Microsoft reaffirmed operating expenses guidance of $26.9 billion to $27.3 billion for its current fiscal year, which ends June 30.

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